How Inflation, Supply Chain, Energy Costs and Property Valuations Amplify Hurricane Risk
The ability to prepare, respond and recover from a disruptive event, like a hurricane, may be correlated to a company’s bottom line and their business resiliency.
According to weather experts, an above average hurricane season is expected in 2022 with at least 19 named storms and nine hurricanes — four of which may be Category 3 or higher.
With National Hurricane Preparedness week underway, now is the time to take a closer look at how increased hurricane activity and current global conditions may broaden the following risks for many companies during the 2022 hurricane season.
Impacts of Inflation
As of April 2022, inflation was up 8.5%, a 40-year high.
While many business owners have noticed an increase in pricing on a wide variety of raw materials and other goods, it is important to consider the impact of concurrent increases along the supply chain because of the interplay between foreign disruptions, increased demand and decreased supply.
The labor force, still in disarray from the wide-reaching impacts of the COVID-19 pandemic, is now feeling the broad sting of inflationary pressures as well.
According to the Consumer Price Index, while energy costs are the main driver of increased costs (32% in 12 months), most categories are seeing broad, double-digit increases well above historical averages.
Since few (if any) businesses can afford to maintain wage increases at a similar pace, inflation may further fuel a shift in jobs that is affecting businesses across numerous sectors. If employees with key incident, crisis and continuity management roles are lost, businesses may enter hurricane season less equipped to weather these types of incidents.
Additionally, many companies are now transitioning into hybrid work environments with a mix of office and remote responsibilities. This might trigger the need to reexamine and update incident response plans and recovery and restart measures to reflect the new workplace realities.
The mid-term outlook for crude oil prices is still grim, with sanctions and other supply challenges outweighing a projected drop in demand.
With the days of $60-$70 a barrel crude behind us for now, businesses will continue to feel the impact to their bottom line as suppliers will pass their increased costs downstream.
With a greater chance of disruption from a hurricane event facing companies across the country, it is imperative that business leaders consider and plan for all of these downstream impacts.
Higher fuel prices alone can have a significant impact on a company’s bottom line. If restoration and recovery depend on refilling a 2,000-gallon tank needed for a generator or refueling an entire fleet of company vehicles, the costs can be staggering.
It is also worth noting the previously mentioned cost of living increases and how that may affect employees and businesses in more subtle ways.
Considering fuel prices today, some employees in coastal areas may decide to simply shelter in place versus fleeing the path of a hurricane. How that could impact recovery and restart efforts is worth reviewing and assessing the impact to business resiliency.
A Recovering Supply Chain
Companies today rely on a global supply chain that is still recovering from the impacts of the COVID-19 pandemic; intermittent and unpredictable shipping delays due to the COVID-19 pandemic shutdowns continue to impact cargo and shipping in Asia, compounded by raw materials shortages and labor challenges in many parts of the world.
A significant storm this hurricane season, or worse, multiple high impact events similar to the 2017 Atlantic basin season, could create significant recovery challenges for businesses.
Supply chain affects all aspects of a business’s functions — from being able to maintain business operations to promptly servicing and repairing materials after a disruptive event.
As an example, the recovery and restart process for businesses impacted by coastal hurricanes relies on an available supply of building materials, such as the materials necessary to repair a damaged roof. Whenever a major hurricane strikes, local supplies for such materials become more expensive and more scarce as demand increases rapidly after the storm.
In today’s world, however, material shortages already exist even before hurricane season; materials like ISO foam board that is used for roof insulation are in very short supply.
Additionally, much of what makes up the typical roof assembly, including foam board, derives from crude oil, so oil price pressures will add another stress point to the post storm recovery.
These compounding factors, combined with the aforementioned labor shortages, could result in extended restoration periods for companies with post-storm damage.
Global automotive supply challenges are yet another area to consider depending on the nature of the company’s industry.
During a hurricane, if business vehicles are damaged or destroyed the process of repairing or replacing them will be extended and even more arduous compared to pre-pandemic conditions.
Preventative measures — whether it be modifying operations or actively removing vehicles from harm’s way — can make a significant difference in how quickly a fleet-dependent business can get back up and running.
Downstream Risk: Building, Contents & Equipment Valuations
The combined impact of oil prices, inflation and supply chain challenges will likely increase the cost of restoring equipment and structures post-storm.
Companies must focus on ensuring that their buildings, contents and equipment valuations reflect current economic realities and replacement costs. Now is the time to review these metrics both internally and with insurance professionals, as undervaluation can put the business in an adverse position.
In addition to the current global factors and the COVID-19 pandemic, many businesses changed their approach to inventory, often stockpiling additional inventory on-site to shield against future shortages.
If properly allocated and kept out of harm’s way, this extra inventory may impact recovery in a positive way.
Conversely, if these increased inventories are exposed to the path of an oncoming storm, it could increase the potential loss at an exposed location and delay the recovery and restart of business operations, especially if multiple locations and revenue generating functions depend on the exposure locations.
The Time Is Now
In 2022, it is not enough to prepare for only the local, physical effects associated with the threat of a hurricane. Businesses also need to consider how the dynamics of the current world can intersect with and exacerbate these threats.
Now is the time for organizations to think critically about how today’s environment is impacting business operations, how a hurricane would change that, and where investments should be made to help lower risk during the upcoming hurricane season. &